Debt, fiscal challenges

EDITORIAL: The Finance Ministry uploaded the Public Debt Bulletin and Fiscal Policy Statement on its website on Monday which provided already released data limited to the first six months of the current fiscal year.

It is baffling as to why more updated information was not included, given that, data till end March is available on the same website under the subheading Monthly Economic Update/Outlook March 2023. Be that as it may, data up to December 2022 fuels two extremely concerning observations in the bulletin as well as in the statement.

First, domestic borrowing rose from 26.7 trillion rupees in December 2021 to 33.1 trillion rupees in December 2022 - a rise of 24 percent in one year alone.

This is a highly inflationary policy and cannot be attributable to the International Monetary Fund conditions - prior or otherwise - with the bulk of this borrowing injected into current (non-development) expenditure.

While the data provided does not distinguish as to when the bulk of the borrowing took place which is necessary to identify which administration must be held more accountable, yet, given that Imran Khan lost the vote of no-confidence on 9 April it stands to reason that the incumbent government is more responsible.

In addition, short-term debt accounted for 32 percent of all domestic debt (at high rates of return) while medium and long-term debt accounted for 68 percent (with rescheduling at a time when the discount rate was 13.5 percent). Any further rescheduling would be at a much higher rate that would significantly raise the domestic debt annual interest payments.

And second, external debt rose from 74.9 billion dollars in December 2020 to 83.824 billion dollars in December 2021 and declined to 78.949 billion dollars end December 2022.

This decline is not indicative of the government’s intent to borrow externally but rather from the failure to reach a staff-level agreement with the Fund on the ninth review, that remains pending to this day, as well as commercial loans becoming prohibitively expensive as all three international rating agencies have downgraded Pakistan, raising the possibility of default.

Multilaterals account for 51 percent of all borrowing by December 2022 up from 47 percent in December 2021 (as other avenues of borrowing dried up), thereby increasing and not decreasing the crisis of funding the ever-rising current budget. It is relevant to note the most disturbing figure of all: 8.9 billion dollars total debt servicing payment for the period with 4.43 billion dollars to commercial banks/short term.

Fiscal policy statement also reveals two disturbing elements. First, it claims the sharp V-shaped economic recovery after Covid-19 (effectively dealt with during the Khan administration) and the international market dynamics subsequent to the Russia-Ukraine conflict has placed the country into a high fiscal deficit crisis.

There is no evidence of recovery July-December 2022 (and into April 2023) and though the Russia-Ukraine conflict raised the price of fuel yet this external factor is sadly buttressed by domestic flawed policies ranging from continued heavy reliance on indirect taxes, whose incidence on the poor is greater than on the rich, to the tune of above 70 percent of all collections, failure to impose a tax on the rich, particularly traders, wholesalers and retailers by ludicrously defining non-filers for political considerations and not imposing a tax on the agriculture income at the same rate as payable by the salaried class, a controlled rupee-dollar parity without the requisite foreign exchange reserves required to allow for market intervention and untargeted politically motivated subsidies. In short, we are at the bottom of the V, though here too an even lower limit is projected if the IMF does not reactivate or unlock the stalled bailout.

And finally, the report’s claim that Pakistan’s economy showed signs of resilience to domestic and global challenges is again not backed by data and the following claims can and must be refuted: (i) remittances did not decline by 9.6 percent (July-November 2022 as opposed to the comparable period of 2021) due to, as claimed, a slowdown in the global economy but due to the flawed policy of Finance Ministry to control the rupee, thereby generating a grey market that once again made hundi/hawala system more attractive than the official channel for the Pakistanis working abroad - an illegal channel that had all but closed during the pandemic due to the global lockdown; (ii) trade and current account deficits have shown an improvement, as claimed in the report, but severe regulatory restrictions on imports are impacting negatively not only on domestic productivity (with containers still parked at ports) but also on employment opportunities that in turn are pushing the newly unemployed to operate in the parallel black economy at best and turn towards crime at worst; (iii) the unrealistic inflation forecast of 11.5 percent for the current year as cited in the report is blamed on ongoing stagflation in the world, and floods that accounted for demand compression.

True, floods did reduce farm output and destroyed infrastructure, however, demand compression can also be sourced to the high rate of interest that accounted for contraction of private sector credit that led to negative growth of large-scale manufacturing sector; and (iv) revenue mobilisation remains a challenge and the focus on indirect taxes has crippled hundreds of thousands of families in recent months.

The incumbent economic team leaders, therefore, must desist from externalizing the causes of the current economic impasse, which is deepening by the hour.

One can only hope for one or two members of the 85 plus federal cabinet to stand up and accept responsibility for the current state and try to convince their colleagues that the need for undertaking politically challenging structural reforms is not only compelling but also emergent.

Copyright Business Recorder, 2023